Real Deflation or the Fed is smoking something?

There's all this talk about deflation recently. Especially the new PPI numbers that just came out suggested that.

But if you look at the consumer level(not the producer price level) it does NOT look like deflation.

Housing prices are going up through the roof and the sky. Stamps still high. Even gasoline prices haven't dipped much since after the war(oh big deal. maybe 10-15cents). Food has remained the same prices.

So, is the Fed and gov't up to something. Maybe we have inflation, but they can't raise rates because that would kill the ailing economy so they are saying deflation.

Harrytrader, what are your thoughts on this?

But ,on the hand, maybe this is a preclude to the coming deflation like the ones in Japan. Read the recent FT and its' scary what Japan went through and is still going through.

But if we are having deflation then commodity prices should go down, but that's not happening. It has been going up. Commodities funds are having a ball these last years or so.

There's all this talk about deflation recently. Especially the new PPI numbers that just came out suggested that.

But if you look at the consumer level(not the producer price level) it does NOT look like deflation.

Housing prices are going up through the roof and the sky. Stamps still high. Even gasoline prices haven't dipped much since after the war(oh big deal. maybe 10-15cents). Food has remained the same prices.

So, is the Fed and gov't up to something. Maybe we have inflation, but they can't raise rates because that would kill the ailing economy so they are saying deflation.

Harrytrader, what are your thoughts on this?

But ,on the hand, maybe this is a preclude to the coming deflation like the ones in Japan. Read the recent FT and its' scary what Japan went through and is still going through.

But if we are having deflation then commodity prices should go down, but that's not happening. It has been going up. Commodities funds are having a ball these last years or so.

This is a very mixed picture...

What are your thoughts ET?

More...

It's been recently discussed in this forum that while simultaneously rising stock and bond prices have been rare in recent memory, on a historical basis lower rates often fuel higher equity prices. Therefore the relationship between rates and stock market performance is tenuous. Sometimes there is a flight to quality trade, sometimes there isn't.

What I've never seen is happening right now as you so adeptly point out. Gold, Crude, Soybeans, Cattle, Housing, Subway Fares.... You name it, and it's in a bull market. Used to be a tremendous negative correlation between metals and bonds. Now they're both bulls marching higher lock in step.

Much of this is probably systematic of the falling dollar. While commodity prices as measured in dollars are rising, in EURO's or even Yen they are quite stable. Also I'm sure there is no shortage of Hedge funds who are positioned wrong off these "old" relationships, and their unwinding of trades is further pressuring markets away from spread levels that have been historical mean values. I am a trader who unfortunately gets bored time to time consistently making money trading index futures. I then try my macro hand at trading bonds against the dollar ect. Let me put it this way, this environment is difficult, volatile and expensive to be wrong. Sucks would be a more succinct way of putting it. But I guess if everything behaved "normally" it wouldn't be too much of a game.

We have quite a double whammy going on in the U.S. now, and they both portend not well for the economic health. There is price deflation in just about anything that is manufactured (i.e. anything that can be made in Asia cheaper than here), while there is abundant price inflation on services and commodities. For instance, that Dell computer that cost $1500 a few years back can now be bought at 3 times the power and speed, with monitor and shipping for a third of the original cost. Same for autos, TV's, DVD players, raw steel, furniture, appliances, etc. Meanwhile, services and non-manufacturing items such as health care, education, insurance and fuel are ever rising. This negatively impacts the consumer for the obvious reasons.

Some would point out that all that price deflation in hard goods is good for the consumer so it cancels out the higher costs of services. Only to an extent, because it's precisely that price deflation in goods that is causing businesses to lose profit margins, therefore employing cost cutting measures such as massive job layoffs, or worse, relocation of jobs that can be done overseas to places like India, Pakistan, et al. That is why we are seeing such a large and growing unemployment rate in the U.S., and that combined with rocketing costs of services is creating a negative spiral for the U.S., because as we know, an out of work consumer can't continue spending long, so all unnecessary purchases go away, and then it becomes a choice like you hear on the news for some people--"do I pay for my food and medicines, or my rent this month?"

You don't have to get my thoughts since you said it : "This is a very mixed picture..."

Well this is the same mechanism as usual to rip off the profit from the process. It's like in gravitation: a constant speed is the same as staying standtill so it is not the level of low inflation or high inflation it is the VARIATION of inflation that is the mechanism of money transfert from the majority to the governement and corporations. It is this differential that constitute the real dollar adjusted from inflation or real wealth. You can't have this variation without what they call inflation and then deflation. But it is inflation or deflation from their point of view whereas from the point of view of the population it is inflation during the deflation phase because Governement and Corporations can profit from the low rate for example whereas the population won't : look at interest rates that are served to the mass of people. In fact they even profit to raise the rates for the poorest who are the first to suffer from crisis and need to borrow only for survival and what happens : they can't return the money and their house is taken by the bankers. There have been a trial already of Citygroup doing that. And it is like that since a long time. It is Japan low rates that permit to borrow from Japan at low cost and place it at huge return on European and US Stock market. It was the same process during World War II with Gold which was deflated in one place and inflated in another place (England). So the term inflation / deflation is to fool people, it's like talking about the average speed of a bike and a shuttle space to give a picture . What is important is not the fake definition of the officials or they must redefine it with complementary explanations, it is to understand the global process: where the interests of creating inflation then deflation because historically it has always been so. Like the new economy concept only people who never study history would believe that it was new whereas it has been used in 1929 and around 1950 already.

If one try to find a justification, let's say that Inflation and deflation ALTERNING has somehow a "social" role: to take off excess money from the people. Because everybody know: even 1$ placed at 5/7% (it is the annual average return) cumulated with years give a lot of money at the end. Do your calculation and ask yourself why every generation MUST be ripped off because if not so everybody would be rich on the planet since one hundred or two hundred years . Of course you could discuss about the morality of this: why prevent the majority from being rich. Perhaps that they are not wise enough : just look at pretention of people during the new economy . In 200 years from the ghetto the Rotschild have become one if not the most powerful family so there are rational reasons to fear that anybody which a minimum intelligence and success with time could become as rich as the richests.

Deflation worries ? not likely. Most of the things I see are inflating:

Insurance bill: Has Inflated compared to last year's rate. Even car insurance go up as the value of the car deflates.
Property taxes: Has Inflated compared to last year's rate
SEC Fees: Has Inflated compared to last year's rate
Cost of datafeed from Exchanges: Has Inflated compared to last year's rate
Public Transportation Fare: Has Inflated compared to last year's rate
College tuitions: Has Inflated compared to last year's rate
Pack of cigarettes: Has Inflated compared to last year's rate

There a rumor going around that this summer's electricity rate is also going up because utilities can't get enough gas.

The only two things I see deflating are:
People's 401(k) account
The interest rate from banks & brokerage accounts for the idle cash paid to their depositers

zboy nailed it. Manufactured goods are seeing severe price pressures brought on by overcapacity and stiff foreign competition. Most services are seeing inflation, with a few exceptions like telcom. Health care is typical. My health insurance just went up by almost 20%. No deflation there, that's for sure. Oh, and that bright idea about retraining manufacturing workers to be software engineers, better forget that unless they want to move to India. I'd suggest they look into nursing. I recently spent a few hours in an ER and overheard the nursing supervisor on the phone begging nurses to come in and work overtime.

The Fed is obviously living in dread of a Japan situation. The one thing an economy that floats on credit cannot handle is asset deflation. They have pumped so much money into the system that it has to bulge out somewhere. Real estate has been one beneficiary.

You'd think the obvious play would be to short the dollar, and that has worked great this year so far, but when I look at Euroland, it makes us look like the picture of health.

We know from the Japan example what doesn't work, namely big government make work spending programs financed by deficits. The old time Keynsian religion just compounds the problems.

I think for once I agree with Bill Fleckenstein, who says there is nothing you can do to cure the hangover from a bubble. The only cure is time. Youcan make it worse however.

If you have a job, my advice is to show up for work everyday and don't piss off the boss. A secure income with benefits is a good thing to have.

excerpt from an article written by Richard Benson of sfgroup on this subject fwiw:

".....How about deflation? Take a look at your bills for insurance (health, home and car), home property taxes, gas, heating, college tuition, and anything the shrinking middle class might want. The CPI is up 3% from April 2002 - April 2003, the dollar is off 30%, and the Fed gets away with actually talking about deflation as a threat. Speculators will look back and laugh. John Q Public will look back and cry.

Greenspanâs history as Fed Chairman suggests that when there is anything obvious that would suggest a prudent Fed Chairman might want to take the Punch Bowl away (like a stock market bubble or housing bubble), he casts around for an excuse to distract from the obvious. For the stock market bubble, the theme was âproductivityâ; For the housing bubble, the theme is âdeflationâ.

In order to understand what is wrong with the system, one needs to focus on what used to be right. The old economy rewarded saving and investment. A balance between the need for funds and the use of funds was achieved by the concepts called credit underwriting and interest rate risk, and a return on capital as well as a return of capital. Investors needed to rely on the credit worthiness of a borrower to be paid back. Savers cared about their money. Lenders and portfolio managers were there to protect them and held to a prudent man rule. Through careful underwriting, only the best projects that could pay the required return got financed. Reasonably high interest rates balanced the risk of repayment, and many credits were denied because, frankly, supplying those projects with credit was foolish and would result in loss. In the Mid-1990âs, the Fed changed and so did the world.

The new Fed Model is based on two simple rules: 1) Forget about actual cash savings, and 2) if two entities in the economy enter into a contract, make sure that the contract is financed. Indeed, everything gets financed. There is no need to ration investments to the best projects and credits. Saving is not necessary because there is credit creation. Since credit can be created without limit, credit underwriting is not necessary. All ideas deserve to be financed. The Fedâs lack of knowledge or concern about credit underwriting is understandable because Fed officials are unlikely to have ever made a loan of their own money that they personally had to collect.

Indeed, the only loan the Fed ever makes is by buying United States Treasury Bonds, which the Fed knows will be paid. Old Treasury bonds will be paid because the Fed can always buy more New Treasury bonds with their own money (just printed up) to pay off the Old Treasury Bonds. Since the Fed can print money, it can always pay itself off! So, why would a central bank concern itself with credit underwriting or whether investments are any good? Money can always be created to make the investments good!

For the system, money has become either totally free, or extraordinarily cheap, and available to all. When you think of it, how could the âdot.com scamâ have been pulled off by Wall Street if money had been tight enough to require serious consideration of an investmentâs value? Now, after $7 Trillion was wiped out, what is the penalty? At worst, a few âfall guyâ stock analysts might be blamed, and a minor âspeeding ticketâ issued to the major Wall Street firms. Cost benefit analysis shows hundreds of billions in profits, and a mere $1.4 billion fine. Not a bad risk reward analysis for your newly minted MBAâs out learning the way the system really works. Wall Street can offer reward without risk, and itâs clear the best money to be made is in Moral Hazard and speculative finance (just donât keep the e-mails)!...."

excerpt from an article written by Richard Benson of sfgroup on this subject fwiw:

".....How about deflation? Take a look at your bills for insurance (health, home and car), home property taxes, gas, heating, college tuition, and anything the shrinking middle class might want. The CPI is up 3% from April 2002 - April 2003, the dollar is off 30%, and the Fed gets away with actually talking about deflation as a threat. Speculators will look back and laugh. John Q Public will look back and cry.

Greenspanâs history as Fed Chairman suggests that when there is anything obvious that would suggest a prudent Fed Chairman might want to take the Punch Bowl away (like a stock market bubble or housing bubble), he casts around for an excuse to distract from the obvious. For the stock market bubble, the theme was âproductivityâ; For the housing bubble, the theme is âdeflationâ.

In order to understand what is wrong with the system, one needs to focus on what used to be right. The old economy rewarded saving and investment. A balance between the need for funds and the use of funds was achieved by the concepts called credit underwriting and interest rate risk, and a return on capital as well as a return of capital. Investors needed to rely on the credit worthiness of a borrower to be paid back. Savers cared about their money. Lenders and portfolio managers were there to protect them and held to a prudent man rule. Through careful underwriting, only the best projects that could pay the required return got financed. Reasonably high interest rates balanced the risk of repayment, and many credits were denied because, frankly, supplying those projects with credit was foolish and would result in loss. In the Mid-1990âs, the Fed changed and so did the world.

The new Fed Model is based on two simple rules: 1) Forget about actual cash savings, and 2) if two entities in the economy enter into a contract, make sure that the contract is financed. Indeed, everything gets financed. There is no need to ration investments to the best projects and credits. Saving is not necessary because there is credit creation. Since credit can be created without limit, credit underwriting is not necessary. All ideas deserve to be financed. The Fedâs lack of knowledge or concern about credit underwriting is understandable because Fed officials are unlikely to have ever made a loan of their own money that they personally had to collect.

Indeed, the only loan the Fed ever makes is by buying United States Treasury Bonds, which the Fed knows will be paid. Old Treasury bonds will be paid because the Fed can always buy more New Treasury bonds with their own money (just printed up) to pay off the Old Treasury Bonds. Since the Fed can print money, it can always pay itself off! So, why would a central bank concern itself with credit underwriting or whether investments are any good? Money can always be created to make the investments good!

For the system, money has become either totally free, or extraordinarily cheap, and available to all. When you think of it, how could the âdot.com scamâ have been pulled off by Wall Street if money had been tight enough to require serious consideration of an investmentâs value? Now, after $7 Trillion was wiped out, what is the penalty? At worst, a few âfall guyâ stock analysts might be blamed, and a minor âspeeding ticketâ issued to the major Wall Street firms. Cost benefit analysis shows hundreds of billions in profits, and a mere $1.4 billion fine. Not a bad risk reward analysis for your newly minted MBAâs out learning the way the system really works. Wall Street can offer reward without risk, and itâs clear the best money to be made is in Moral Hazard and speculative finance (just donât keep the e-mails)!...."

this makes so much sense. i also think greenie is an old man who wants to go out popular at any cost. during the 90s he was almost treated like a god. when the bubble burst it all changed. if he is able to pump this bubble up again for a short time he will retire and declare victory and leave the mess for someone else to clean up.